Sane Portfolio enters its 23rd year

Some people want to invest in the stock market but don’t want to be too bold.

For the somewhat conservative investor, I put together a collection of stocks that I think might be suitable. I call it the Sane Portfolio.

There are a dozen or so stocks in this portfolio, and I refresh the membership list once a year. To get in, a stock must meet the seven criteria described below. Once you join, the stock stays in unless it fails to meet one of the seven criteria.

Over 22 years, the Sane Portfolio has achieved an average annual return of 11.4%. This is slightly better than the Standard & Poor’s 500 Total Return Index, which has an average return of 10.3%.

Please note that the results in my columns are hypothetical and should not be confused with the results I obtain for clients. Furthermore, past results do not predict the future.

Over the past 12 months, Sane Portfolio returned 17.06%, underperforming the index’s 20.09%. Top performers included Mueller Industries Inc. (MLI), which rose 72%, and Encore Wire Corp. (WIRE), which rose 70% and was acquired. The worst performer was Archer-Daniels Midland Co. (ADM), which fell 30%.

Eligibility obstacles

To qualify for the Sane Portfolio, stocks must clear seven hurdles. None of them are particularly difficult in and of themselves, but few companies can clear all seven.

The obstacles are as follows:

· Market value of at least $1 billion.

· Debt less than equity.

· Return on equity of 10% or higher.

· Share price less than 18 times earnings per share.

· Share price less than 3 times sales per share.

· Share price less than 3 times book value (net enterprise value per share).

· Five years of earnings growth averaging 5% per year or more.

This year, eight “reasonable” companies remain eligible, leaving four vacancies to be filled.

Winning streaks

DR Horton Inc. (DHI), the nation’s largest homebuilder, is back for its fifth year. The number of homes for sale is currently low, but the average sale price is high, around $487,000. If mortgage rates drop a point or two, we should see an increase in home sales.

Nucor Corp. (NUE) is back for the fourth time. A recycling pioneer, America’s largest steel company. Nucor has grown its revenue by more than 10% annually over the past decade.

Paccar Inc., which makes heavy-duty trucks under the Kenworth and Peterbilt brands, also has four times more. Paccar has about 30% of the U.S. heavy-duty truck market, second only to Daimler-Benz Group of Germany, which makes the Freightliner brand.

Three timers

Mueller Industries Inc. (MLI), a manufacturer of metal and plastic parts such as rods, pipes, valves and coils for refrigerators, is entering its third year of operation. It has posted a profit in each of the last 30 years (including Paccar). Mueller has very little debt.

Boise Cascade Co. (BCC) is also back for a third year. It makes engineered lumber, plywood and wood products. If the housing industry improves in the next year or two, that will help Boise.

Come back for a second

Archer-Daniels Midland Co. (ADM), a processor of agricultural products, is back for a second year. It’s a low-margin business, but the stock is currently trading at 0.34 times the company’s sales, which is a bit cheaper than usual.

Also in second place was WR Berkley Corp. (WRB), the only financial stock on the list. It’s a property and casualty insurer that has posted a return on equity of 15% or higher for four years in a row.

Fertilizer producer CF Industries Holdings Inc. (CF) rounds out the list of returnees. It had a tough year last year but managed to stay on the list.

New arrivals

No longer eligible are Amkor Technology, which was in the portfolio for three years, Columbia Sportswear Co., which was in the portfolio for two years, and Coterra Energy Inc. (CTRA), which lasted only a year. In addition, Encore Wire was acquired, creating a fourth vacancy.

Since Coterra went bust, there are no energy stocks in the portfolio. I’m including EOG Resources Inc. (EOG), a large oil and gas producer with large holdings in Texas.

There are currently no retailers listed. Enter Academy Sports & Outdoors Inc. (ASO), which sells sports equipment, primarily in the South and Midwest.

Sane Portfolio is also naked in the tech space, now that Amkor is out. (Many tech stocks are selling for more than 18 times earnings.) Enter Photronics Inc. (PLAB) of Brookfield, Conn. It makes photomasks, used to make integrated circuits and flat-panel displays.

Finally, I would choose Monarch Casino & Resort Inc. (MCRI), which has seen its revenue grow at an annual rate of 8% over the past decade.

Disclosure: I own DR Horton and Nucor for one or more clients. I own Amkor Technology in my hedge fund.